Thursday, March 21, 2013

The new variation on the old "a chicken in every pot" phrase seems to be a college degree for all. While this is a fantastic goal, it is not without challenges and risks. For example, if I asked you to name the top 2 Universities in the US by enrollment how would you do? I think I know a little about higher education and I never would have guessed the two largest institutions.

How about

The University of Phoenix with roughly 308,000 students and
Ashford University with roughly 75,000 students?!?!?

In 7 years Ashford transformed from a sleepy 300 student college to an online behemoth with 75,000 students. Both Ashford and Univ of Phoenix are "FOR PROFIT" institutions and they have been very good at the profit part of the education experience. Univ of Phoenix's revenues exceed $3 billion last year and the bulk of that money (some 80% +) was from Federal Student Aid programs. The default rate of students attending Univ of Phoenix is a staggering 26% (vs. roughly 10% for traditional institutions). Both of these schools have recently come under scrutiny by accrediting bodies which is a good thing, but the fact remains that 5 of the 20 largest schools in the US are FOR PROFIT colleges and that probably isn't an accident.

To be fair though it's not just for profits that seem to be taking advantage of the system. Included in the top ten schools be enrollment are:

There is too much money in education to trust the market forces to work without regulation. Since this is taxpayer money we should demand a better product for our students. I have a idea on this front that I'll share soon :)

The news out of Cyprus remains very fluid but it sounds like the deposit tax for the most part is going to be off the table for most depositors. The latest news sounds like there will be some sort of infusion of capital from Mother Russia which will give Russia access to natural resources in the country. As others have put it, "It sounds like Russia just bought Cyprus". Again, Cyprus is a bit player but the implications for the Euro and raising the concept of a deposit tax certainly got everyone's attention.

I follow a bunch of smart reporters in the Korean Peninsula that are really tuned into the rhetoric that comes from N. Korea. While Matt Drudge will scream about Kim Jong Un's latest pronouncement they typically point to similar statements that put all of the headlines in perspective. Well, some of that changed in the last 24 hours. Many of these people seem to indicate that the S. Korean hack-a-thon (now alleged to have come from a Chinese IP, but any decent hacker would know how to fake the IP) and air raid sirens in N. Korea and N. Korea's open threat to hit US interests in the Pacific are all new levels of intensity. I still presume that this is just a ploy for attention but it bears watching because the pattern has shifted.

Ben Bernanke gave the all clear again yesterday and that helped stabilize markets but many people that read beyond the headlines see a few red flags.

1) Copper - Copper has long been a leading indicator of global economic activity. Admittedly, this trend can breakdown over time as new materials emerge but the correlation between stock prices and copper prices has historically been very strong. Until recently when something has gone awry....

2) Caterpillar - "Caterpillar Inc. said Wednesday that global sales of its heavy equipment fell 13 percent for the three-month rolling period that ended in February, hurt by a steep drop in Asia Pacific demand."

3) Fedex - Saw global shipments tick up slightly but customers are choosing lower cost delivery options (truck vs. air). This seems to indicate that customers are more cost conscious and may signal some rough times ahead.

Sunday, March 17, 2013

The markets have started opening around the world and most are off about 2% which is noticeable but in light of the huge run-up we've had recently it's not that bad.

The news out of Cyprus has clearly shaken global markets. The new numbers the government is floating are - 3.5% tax for under 100k Euros, 10% for 100k to 500k Euros and up to 12.5% for balances over 500k. The risk is that this causes an accelerated flight of capital from areas that are considered at risk - Greece, Italy, Portugal, France - toward places like Switzerland and Singapore and perhaps the US (which would explain the strengthening US dollar).

Banks in Cyprus will be closed until Wednesday so this story will continue to dominate the international headlines (the lack of coverage in the US is surprising).

Saturday, March 16, 2013

This sounds like something that you'd hear on late night AM radio when driving across central Pennsylvania (that's a topic for another day, btw). The news that Cyprus would impose a mandatory bank bailout tax on bank accounts has caused more than a minor stir in Europe on an otherwise quiet Saturday.

Here are the details of the $10 billion bailout announced last night...

* A one-time tax of 9.9% of deposits in excess of 100,000 Euros.
* A one-time tax of 6.75% of deposits under 100,000 Euros.

So far, Cyprus has been just a bit player in European Debt drama, but the nature of this story is scarier than the size of this deal. The fact that Russian billionaires like to park their money in Cyprus is going to further complicate matters. The drama in Cyprus has been pretty intense. People standing outside of banks waiting for them to open on Monday. Even one picture of a guy that drove a bulldozer down to the local branch to request his money :)

Again, this isn't an income tax, or a capital gains tax, this is a tax to save the banks where your deposited your money. The concern will not be what this means for tiny little Cyprus but what if this sparks minor (or major) bank runs in Greece, Italy or Spain. I view this as highly unlikely to cause widespread panic, but this is one of those wild card "Black swan" style events that needs to be watched very closely. I didn't expect one guy lighting himself on fire in Tunisia to cause more upheaval in the Middle East than we'd seen in 50 years, but it did. In the era of Twitter, rumors of bank runs can spread like wildfire.

Once talk radio in the US gets wind of it, there will be no stopping the conspiracy theories. So please try to tune this out and focus on reality.

Friday, March 08, 2013

I was privately predicting that the jobs number would come in around 187k jobs and the February number blew that away. However, if you back out the revisions to January (-38k) you get a number pretty close to my estimate -

February: +236k
January: -38k

Net: +198k.

The household survey (where we get the "unemployment rate) saw the total # of "unemployed" 300k but according to the survey 170k of those were newly employed while 130k dropped out of the workforce. Depending upon your political affiliation you may see this as a natural shift in our country's demographics or a manipulation of data as workers drop out of the workforce.

Participation remains at historic lows but I expect it to stay there for many years because we've become an aging culture but that's a topic for another day.

The stock market's reaction has been fairly muted (but it's begun a steady climb and will obviously be ANOTHER RECORD DAY), but the reaction in other markets (debt, currencies) has been more substantial. Remember, I believe that without the Federal Reserve (and other central banks) flooding the markets with liquidity I'd expect stocks to be 25-30% lower. If the economy has turned a corner and the Fed started to pull back it could lead to a negative reaction in stocks despite positive economic data.

The composition of the jobs created remains poor - mostly part-time positions, more staffing positions, retail, restaurant and surprisingly construction. I say surprisingly re: construction jobs because we had a blizzard in the Northeast and permits were down in February. I believe the construction jobs may be in multi-family but I can't confirm that.

It's interesting to note that with three years of jobs improvements we've now reached the same point which was the absolute BOTTOM of the 2001 recession. That gives you a little perspective on the scope of the 2008 recession.

Tuesday, March 05, 2013

Well, despite the fact that the Dow Jones Industrial Average is the worst measure of stock market performance it will be all the media will be talking about for the next 24 hours. It's funny to note that if Apple had been added to the Dow as was expected last summer, the Dow would still be close to 700 points from a new high.

Hidden within many of the articles that recycle the same old Wall Street cliches - climbing a wall of worry, a rush of cash from the sidelines, blah, blah - you'll see the real reason for this last blast higher: Loose monetary policies around the globe.

Much of the economic news around the globe for the past 24 hours has been very negative however, when viewed through Wall Street's rose colored glasses bad news becomes "the Fed will keep easing" which equals higher asset prices.

I don't often agree with Jim Cramer but when I do it is when he says things like "We all know this is going to end badly, but in the meantime we can make some money." Kudos to the guys at zerohedge for putting a little perspective on this record:

I've been saying for the last 2 months that it feels like the Spring 2007. Nothing could ever go wrong and housing prices would go up 20% per year forever. At that time we were starting to see some cracks in the economy - copper prices for example - and we are again seeing those same cracks. These rallies tend to have a sprinters burst where they explode for 10-20% in a very short period of time before coming unwound. Baring some kind of external force (Iran, Gov't shutdown) I think we're due for one good rush forward (unless we've just had it from Jan 1 to today) and then I suspect we may be looking at 2008 all over again.

As my daughter often says, "Dad, you are the cloud on my sunny day" and I'm happy to be the cloud in this case, because when EVERYONE is marching in one direction it makes me ask why?

Cheers!

PS - How long before Dow 15,000 hats show up on the CNBC? I put the over/under at 8 hours :)

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About Me

I grew up in La Fargeville before attending college in Manhattan and ultimately working on Wall Street for about 10 yrs. I left NYC/NJ in 2003 and relocated my family to the beautiful waterfront of Clayton, NY. I spend my days caring for my 2 daughters and dabbling in the markets.